PayPal Faces More Lawsuits, Could Lose MasterCard

Two more companies have accused online payment firm PayPal of using their technology without permission, and the company's relationship with MasterCard may be in jeopardy, PayPal disclosed in its quarterly report.

Loss of MasterCard compatibility would be a significant blow because 15 percent of all money transferred via the PayPal network during the first quarter was funded with MasterCard credit cards.

MasterCard Questions

In its filing with the U.S. Securities and Exchange Commission, Pay Pal said that as of May 1st, MasterCard enacted a rule that could require PayPal's credit card processing bank to enter into separate agreements with each customer who regularly uses PayPal to accept payment for goods or services. Many such customers are eBay (Nasdaq: EBAY) sellers.

"The Company is unable at this time to predict how this amendment will affect its business, but it could require the Company to change the interrelationship among itself, its customers and its credit card processing bank in ways that would increase its costs, reduce the attractiveness of the Company's service or both," PayPal noted in the filing. "This amendment could also lead to the Company being unable to continue accepting MasterCard."

Technology Tangles

In addition to its credit card snags, PayPal -- which settled a patent infringement lawsuit filed by New York-based CertCo just before its successful IPO in March -- noted that it has been hit with a second suit and may face a third.

PayPal said it was sued May 7th by Tumbleweed Communications (Nasdaq: TMWD), a Redwood City, California-based software firm that alleges PayPal infringed on two of its patents related to delivery of documents over the Internet.

In its filing, PayPal denied the claims and said it plans to "contest the suit vigorously."

Another company, NetMoneyIN, has not yet sued but has demanded that PayPal purchase a license for what it said are two patented technologies for managing credit and debit payments online. That firm has said it will file suit if PayPal does not agree to license the technology.

"The Company believes that it does not infringe the patents, among other reasons because the Company does not provide direct credit or debit card processing for merchants," PayPal said.

Case Closed

PayPal noted that it settled the earlier CertCo suit by making an "inconsequential payment" to that firm, which had claimed to be the inventor of the underlying technology on which PayPal's person-to-person payment network is built.

Despite that legal stumbling block, which reared its head just hours before PayPal's Wall Street debut, PayPal stock has traded well above its offering price of $13. Shares were up early Thursday to $24.02.

PayPal also faces two class-action lawsuits from members who claim the company was slow in responding to their requests for refunds and thwarted their attempts to recoup their losses.

Sound Fundamentals

Morningstar.com analyst George Nichols told the E-Commerce Times that PayPal's long-range outlook remains upbeat, despite the rash of lawsuits and outstanding regulatory challenges.

"There are a lot of hurdles to clear, but over the long term I expect the firm to fare well despite regulatory threats and other challenges," Nichols said. "It still has fantastic fundamentals in terms of growth."